The attraction to most people in purchasing a small business is obvious. The amount of small businesses on the market and the cost is considered low compared to a middle-market business.
People are generally anxious about starting their own small business, the level of financial input and time put in to the business can be far greater than imagined. At least 50% of these types of ventures fail with the majority not getting passed the first 2 years. The odds are better for people acquiring a franchise; however it has to be remembered that royalty payments of up to10% have to be met annually.
One of the many problems acquiring a small business can be the asking price. Many small business owners are unsure how to properly valuate a business. The use of mythical formulas or the 'sweat equity' based on how much work has been put in is totally useless.
To value a small business this is a good guide is;
Retail Businesses 30% of annual sales
Service Businesses 60% of annual sales
Distribution Businesses 35% of annual sales
Manufacturing Businesses 50% of annual sales
Naturally these are just guides, in reality a businesses value is only really worth what a person is willing to pay for it. Other considerations are; cash flow, assets, liabilities, growth potential and risks. The terms and conditions of the lease, the state of machinery and how many staff are employed, the list really is endless.
In summary, before even contemplating acquiring a small business, you must realise that the failure rate is extremely high. Proper research, good timing and a good amount of luck should help your business being one of success stories.
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